Borrowing from Reserves: The Right Way

Budgeting is a critical aspect of managing a homeowner’s association. It helps ensure that the community’s financial needs are met while maintaining financial stability. If situations call for it, boards are allowed to borrow from reserves to meet short-term cash flow problems or other expenses. However, there are specific measures the board must take in order to properly borrow from reserves. In this blog, we will delve into the requirements for borrowing from reserves, along with other common budgeting practices, to guide your community toward success.

Borrowing from Reserves

Borrowing from reserves can be a valid and necessary approach for an HOA, but it must be done correctly to avoid legal consequences. Unfortunately, many boards treat reserves as a catch-all piggy bank, dipping into them for various expenses, even those that should have been anticipated. To use reserves effectively, a board must embrace the practice while adhering to the rules.

Proper Notice and Agenda

Before borrowing from reserves, it is crucial that the board follows the proper procedures. The CA Civil Code 5510 requires that the board meeting notice and agenda include a discussion of borrowing from reserves, the purpose of the loan, how it will be repaid, and whether a special assessment is anticipated. Failing to include these details can lead to problems down the line.

Written Findings in Meeting Minutes

During the board meeting, the board must provide written findings that detail the reasons for the loan and how it will be repaid. These written findings must be included in the meeting minutes. This ensures transparency and accountability in the decision-making process.

Repayment Plan

The board must articulate a plan for repaying the loan within the next 12 months. This plan can involve repaying the full amount within that time or, if necessary, extending the repayment period by another 12 months. Having a clear plan is crucial to ensure that reserves are replenished.

Scenarios and Repayment

Let’s consider a scenario where an HOA decides to borrow from reserves to cover an insurance premium that was not budgeted for in the current fiscal year. If this decision is made correctly, with all the necessary details in the meeting notice, agenda, and written findings, it’s a valid use of reserves.

However, when unforeseen expenses arise, the board must still consider whether these expenses were genuinely unforeseen or could have been anticipated. For example, if the board had knowledge that insurance premiums were skyrocketing and didn’t budget accordingly, it might not qualify as an unforeseen expense.

Emergency Special Assessments

In situations where an expense is extraordinary and truly unforeseen, the board can consider an emergency special assessment without membership approval. This assessment is only allowed for expenses that were not known at the time of budget preparation. While this provides flexibility, it is essential to be cautious and not abuse the emergency special assessment option.

Other Common Budgeting Pitfalls

Apart from borrowing from reserves, there are other areas where boards often make mistakes:

  • Failure to budget for foreseeable expenses: Boards should proactively budget for expenses that can be reasonably anticipated, such as maintenance and weather-related issues. Not budgeting for such expenses can lead to financial strain.
  • Overlooking local factors: Different regions may face specific challenges or weather-related issues. Boards should tailor their budgets to their local circumstances.
  • Not thinking about the future: Being proactive and looking ahead is crucial in budgeting. Boards should meet with experts and their property management company to create a plan for anticipating future challenges, especially if there are impending legislative changes or mandatory inspections.

Proper budgeting is essential for the financial health of an HOA. Borrowing from reserves can be a valuable tool when used correctly, but it must adhere to legal requirements. Boards should anticipate foreseeable expenses, follow regulations, and always think ahead with their budgeting practices to ensure the long-term financial well-being of the community. By avoiding common budget mistakes, an HOA can navigate financial challenges more effectively and maintain its credibility.

If you’re seeking professional assistance to ensure your community is financially secure, we’re here to help. Please contact us today for reliable and knowledgeable HOA Budgeting and Reserve study services.

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